When meeting with your account manager, come prepared. At the time of booking your appointment, find out what you need to bring. Maybe the bank or credit union already has your most up-to-date financial information in the file, maybe it doesn’t. It’s good to have the last three years income tax returns and a statement of net worth.
The statement of net worth has all of your assets balanced to your liabilities and net worth. It is also known as a balance sheet. Assets = Liabilities + Net Worth. Have an up to date list of land, buildings, equipment, grain, forage, livestock, cash on hand, and its realistic market value. Knowing the details of your debt is extremely important. Have all accounts payable, cash advances, lease payments and operating loans listed. Have the original balances of loans, the current balance, interest rate, and payment frequency and amount.
Your account manager uses three key ratios derived from information on your net worth statement and your income tax.
First is the current ratio, which is current assets divided by current liabilities. Current assets are your assets that are either cash or easily converted to cash within one year. Current liabilities are the debts that are due in the coming year, including the current portion of your longer-term debts (loan payments due in the next year). The higher your current ratio, the better it is. For example, a current ratio of 2:1 shows that a farm has two times the current assets to current liabilities. To a lender, that means you have room to operate your business over the next year and make your payments.
The debt to net worth ratio is simply total debt divided by net worth. It shows how much of your operation you own and how much is owned by creditors. In this case, the lower the better. A debt to net worth ratio of 0.25:1 means you own 75 per cent of your operation and have a strong equity position.
The last and most heavily weighted ratio is the debt servicing ratio. It is the average amount of income available to service debt (taken from each of the past three years’ income tax) divided by your principal and interest payments projected for the next year. To arrive at the historical average debt servicing residual, we take your pre-tax accrued farm income, add the interest expenses and the depreciation, subtract the living expenses, add any net off-farm income and any loss carry-forward in the form of inventory adjustments. It’s complicated and it works very well to show if a farm can support an additional payment or even the payments they currently have. In this case, the higher the better. A debt servicing ratio of 1.9:1 means the farm can support its payments 1.9 times over if necessary based on the past three years’ performance.
These three ratios combined paint an accurate picture of your farm at that point in time and can show what changes need to be made to make your farm goals a reality.
Robin Christian Blythe farms near Kenville, Man., and is an account manager at a local financial institution. She has a diploma in agriculture from the University of Manitoba.